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Golden Agri-Resources

Producing sustainable palm oil

Golden Agri-Resources (GAR) is the world’s second-largest palm oil plantation company with nearly 500,000 hectares – including smallholders – of plantation in Indonesia. It has integrated operations focused on the production of palm-based edible oil and fat. In 2009, the company was accused by Greenpeace and other NGOs of contributing to deforestation and causing damage to biodiversity through operation of its palm oil plantations. This resulted in a number of its customers including Unilever, Nestlé, Kraft and Burger King cancelling their contracts. Although they made up less than 3% of GAR’s revenue, the incident tarnished the company’s reputation.

What we didWe commenced engagement with GAR in 2009. We focused on the objective of ensuring that all of its palm oil is certified in accordance with the respected Roundtable on Sustainable Palm Oil (RSPO), as well as putting together a credible strategy to address wider sustainability allegations, including the setting of stretching targets.

In addition to requesting systematic RSPO certification, we pressed GAR to dedicate more resources to the issue of sustainable palm oil.

In 2012, we conducted a site visit to GAR plantations in the Riau region of Indonesia to inspect its methods of consultation with the local community and management of impacts on carbon emissions, as well as to assess whether its commitment to full RSPO certification by 2015 was sufficiently stretching. Following the visit, we engaged the company’s senior independent director to urge the board to publish a time-bound action plan for implementation of its sustainability strategy.

ResultsAlthough the reported breaches of best practice guidelines and local regulations were historic and minor in the context of its operations, the company understood the importance of demonstrating its commitment to sustainability. It agreed to strengthen its standard operating procedures on sustainability matters and to commence dialogue with the RSPO.

In 2010 the company committed to certifying all of its plantations to RSPO standard by 2015. A year later, the company also developed a Forest Conservation Policy to ensure sustainable growth and gained RSPO membership. Unilever and Nestlé resumed buying from GAR in 2011.

In addition to these commitments, the company pledged to oversee a wider cultural change in its attitude to environmental sustainability. This included ensuring that its lead independent director would oversee environmental and social risks and that the company’s environmental commitment would be driven by a culture of awareness of the importance of sustainability at the board level. The company also nominated an executive director to be responsible for sustainability issues to enhance the board’s reporting on sustainability.

We continue to monitor the company to ensure that it is on track to meet full RSPO certification by the end of 2015. In addition, GAR now invests in palm oil operations in Africa, which raises new challenges and requires new approaches on the issue to be developed beyond those in Asia.

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Sachi SuzukiSachi Suzuki is sector lead for industrials and responsible for engagement activities mainly in Japan and southeast Asia. Prior to joining Hermes EOS, she worked as a senior research analyst at EIRIS, where she was responsible for the assessment of the ESG performance of Japanese companies, as well as research on bribery and corruption. Sachi graduated from Keio University in Japan with a degree in Economics and holds an MSc in Development Studies from the School of Oriental and African Studies, University of London. She holds the CFA Institute’s Investment Management Certificate. Read all articles by Sachi Suzuki